A Day in the Life of a JOA – Selected Daily Operational Issues1

By: Nicholas P. Laurent MCGINNIS, LOCHRIDGE & KILGORE, L.L.P. 600 Congress Ave., Suite 2100 Austin, Texas 78701 (512) 495-6081/(512) 505-6381(fax) [email protected]

South Texas College of 2011 Energy Law Institute September 1, 2011

1 The author wishes to thank Greg Mathews, Senior Counsel, Negotiations and Legal, Chevron North America Exploration and Production Company, for his thoughts and assistance in preparing this paper. All errors and omissions are the responsibility of the author.

TABLE OF CONTENTS

A. Basic JOA functions ...... 1

B. History of the JOA ...... 1

C. Important JOA provisions ...... 1

D. JOA issues ...... 2

1. Other operations clause ...... 2

a. Paint Rock Operating, LLC v. Chisholm Exploration, Inc., 339 S.W.3d 771 (Tex. App.—Eastland 2011, no pet.) – operator breaches the JOA if it doesn’t provide an AFE before issuing a JIB ...... 4

b. Cone v. Fagadau Energy Corp., 68 S.W.3d 147 (Tex. App.—Eastland 2001, pet. denied) – non-operator’s refusal to consent to an “other operation” does not preclude the operation, but prohibits the operator from charging the non-operators for those expenses ...... 4

i. Cone’s criticism of Texstar North America v. Ladd Petroleum ...... 5

c. LPCX Corp. v. Red Eagle Oil Co., 818 P.2d 431 (Okla. 1991) – operator liable for cost of work and attorneys’ fees when it performed “other operations” without an AFE but billed the expense to the non-operators ...... 6

d. Recommendation for operators ...... 6

2. Liability of non-operator to third parties ...... 6

a. Tawes v. Barnes, 340 S.W.3d 419 (Tex. 2011) – mineral lessor is not a third-party beneficiary of the JOA ...... 7

b. Lavy v. Pitts, 29 S.W.3d 353 (Tex. App.—Eastland 2000, pet. den.) – non-operators not liable for pumper’s personal injuries because non- operator did not exercise control over the operations or give any instructions...... 9

c. Berchelmann v. The Western Company, 363 S.W.2d 875 (Tex. App.—El Paso 1962, writ ref’d n.r.e.) – non-operators not held liable to suppliers hired by the operator when the operator failed to pay ...... 9

d. Non-operator considerations...... 10

3. The JOA operator is held to the “reasonably prudent operator” standard ...... 10

a. Gross negligence...... 10

P-ii b. Willful misconduct ...... 11

c. Operator standards under prior AAPL JOAs ...... 11

d. What is a reasonably prudent operator? ...... 11

e. IP Petroleum Co., Inc. v. Wevanco Energy, L.L.C., 116 S.W.3d 888 (Tex. App.—Houston [1st Dist.] 2003, pet. denied) – even if the jury finds the operator acted with gross negligence or with willful misconduct, if the does not support such a finding, the operator cannot be found to have violated the JOA...... 12

f. COPAS issues ...... 12

i. Operator must timely send JIBs, but if the non-operator fails to timely object, the non-operator may still be liable for the charge ...... 13

ii. Paint Rock Operating, LLC v. Chisholm Exploration, Inc. 339 S.W.3d 771 (Tex. App.—Eastland 2011, no pet.) – non- operator fulfills JIB objection requirement without explaining why it objects to JIBs ...... 14

4. Non-consent penalty provisions ...... 15

a. XTO Energy Inc. v. Smith Prod. Inc., 282 S.W.3d 672, n. 2 (Tex. App.— Houston [14th Dist.] 2009, no pet.) – a non-operator cannot change its election to avoid potential non-consent penalties even if thirty days from the date of the notice have not gone by ...... 15

b. Valence Operating Co. v. Dorsett, 164 S.W.3d 656 (Tex. 2005) – the operator can commence subsequent operations before the expiration of the notice/participation election period ...... 16

5. Removal or resignation of the operator ...... 17

a. Resignation/deemed resignation ...... 17

b. Removal ...... 17

c. Injunction to remove an operator ...... 18

E. Conclusion ...... 19

P-iii

A. Basic JOA functions courts have routinely recognized that competent parties can for whatever Joint operating agreements (“JOA”) have they want, with some limited exceptions.6 been described by the Supreme Court of Texas as “contract[s] typical to the oil and B. History of the JOA gas industry whose function is to designate an ‘operator, describe the scope of the The most widely recognized JOA is the operator’s authority, provide for the FORM 610 JOA published by the American allocation of costs and production among the Association of Professional Landmen parties to the agreement, and provide for (“AAPL”). That form has been modified in recourse among the parties if one or more relatively substantial ways four times in its default in their obligations.’”2 The JOA 50+ year history. provides a mechanism to join together several mineral lessors, landowners, The first AAPL JOA was published in 1956. working interest owners, other investors In 1967, the original JOA form was revised, and/or operators to agree on how joint and the AAPL JOA underwent substantive exploration and production operations will revisions again in 1977, 1982, and 1989. be conducted. JOAs “govern operations Many oil and gas companies, investors, involving great financial risk.”3 At its most operators, and non-operators use the entire basic level, the JOA fulfills three basic form AAPL JOA, others make changes from functions among interested parties: (1) the Form 610 and in some instances, oil exploration; (2) drilling; and (3) production. companies utilize their own form JOA. Other form JOAs have been published, but The standard JOA typically contemplates are not used nearly as much as the AAPL two parties, or two groups of parties: (1) the Form 610 JOAs in the non-Rocky Mountain operator; and the (2) non-operators. While region.7 a JOA can be a complex agreement that governs the exploitation of hydrocarbons C. Important JOA provisions among operators and non-operators,4 at the end of the day it is just another contract, and All JOAs will define, in some way, the Texas courts have noted that “[i]n operational area. In the AAPL Form 610 interpreting a joint operating agreement, we 5 apply principles of contract law.” Texas 2005, pet. denied).

6 St. Louis S.W. Ry. Co. of Tex. v. Griffin, 171 S.W. 2 Tawes v. Barnes, 340 S.W.3d 419, 426 (Tex. 2011) 703 (Tex. 1914) (“The citizen has the liberty of (quoting Seagull Energy E & P, Inc. v. Eland Energy, contract as a natural right which is beyond the power Inc., 207 S.W.3d 342, 344 n. 1 (Tex. 2006)). of the government to take from him.”). 3 Tawes v. Barnes, 340 S.W.3d at 426. 7 See, e.g. J.O. Young, Oil and Gas Operating 4 Professor Kuntz has noted “[t]he JOA is a carefully Agreements: Producers 88 Operating Agreements, structured instrument designed to govern a great Selected Problems and Suggested Solutions, 20 variety of operations over a long period of time.” 2 ROCKY MTN. MIN. L. INST. 197, 202 (1975). There EUGENE KUNTZ, A TREATISE ON THE LAW are model JOAs for coalbed methane fields, offshore OF OIL AND GAS 107 (1989). operations and international operations that may differ substantially from the AAPL Model Form 5 ExxonMobil Corp. v. Valence Operating Co., 174 610s. S.W.3d 303, 312 (Tex. App.—Houston [1st Dist.]

P-1 JOAs, the operational area is defined as the D. JOA issues “Contract Area.” The AAPL Form 610- 1989 JOA provides: “Most oil and gas disputes are over the ‘meaning’ of a contract or conveyance.”12 The following exhibits, as indicated Professor Martin observes: “The source of below and attached hereto, are [JOA] litigation now is not so much the incorporated in and made a part specific language of the forms but the hereof: standard applied by the court to the conduct ___ A. Exhibit “A,” shall include of the parties (especially the operator) under the following information: the agreement, or perhaps despite the (1) Description of lands subject to agreement.”13 this agreement, (2) Restrictions, if any, as to depths, 1. Other operations clause formations, or substances, (3) Parties to the agreement with Under the “other operations” clause in an addresses and telephone numbers for AAPL 610-1989 JOA, the notice purposes, (4) Percentages or fractional Operator shall not undertake interests of parties to this agreement, any single project reasonably (5) Oil and Gas Leases and/or Oil estimated to require an and Gas Interests subject to this expenditure in excess of agreement.8 ______Dollars ($______) except in connection with Despite the inclination to define the drilling, sidetracking, “Contract Area” in terms of a set number of reworking, deepening, acres or in some other simple surface completing, recompleting, or definition, the “Contract Area” is actually a plugging back of a well that multi-dimensional description that may only certain formations or up to or applies and that any agreement 9 below certain depths. To avoid statute of between the parties concerning the M.T. Cole ‘A’ frauds10 issues and to avoid future lease is not enforceable”); Kuklies v. Reinert, 256 controversies on what the “Contract Area” S.W.2d 435, 444 (Tex. Civ. App.—Waco 1953, writ really is, the parties should ensure the ref’d n.r.e.) (“It is our view, under the undisputed record and the foregoing authorities, that the “Contract Area” is completely and 11 description of the 230 acres out of the Julius Reinert accurately described where appropriate. tract is sufficient to bring it within the rules of construction laid down by our courts as hereinabove 8 AAPL Form 610-1989 JOA at Art. II.A. cited, and it necessarily follows from what we have said that the consolidated area is sufficiently 9 See, e.g. Morgan v. Mobil Oil Corp., 726 F.2d 1474 described in the Gas Division Order and Operating (10th Cir. 1984). Agreement.”). 10 The statute of frauds requires that the document 12 David E. Pierce, 1 TEXAS J. OF OIL, GAS, AND “describe[] the property and contain[] sufficient data ENERGY LAW 1, 2 (2006). such that a party familiar with the locality can 13 identify the property with reasonable certainty.” See OIL AND GAS LAW FOR A NEW CENTURY: TEX. BUS & COM. CODE § 26.01. PRECEDENT AS PROLOGUE 98, 99 (Patrick H. Martin ed., Matthew Bender 1997) (Chapter Four, The Joint 11 See Carpenter v. Phelps, --- S.W.3d ----, 2011 WL Operating Agreement – An Unsettled Relationship?, 1233312, *4 (Tex. App.—Houston [1st Dist.] 2011, by Patrick H. Martin). no pet. h.) (“we sustain issue two and hold that the

P-2 has been previously interest owner approval/consent before authorized by or pursuant to conducting anything that could be construed this agreement, provided as an “other operation.” As the cases however, that in case of described below demonstrate, the operator explosion, flood or other could be liable for damages and attorneys’ sudden emergency, whether fees if the operator performs “other of the same or different operations” without first issuing an AFE.15 nature, Operator may take such steps and incur such The “other operations” clause broadly expenses as in its opinion are includes any well work and operations that required to deal with the are not either previously authorized by the emergency to safeguard life parties or necessary to correct “sudden and property but Operator, as emergenc[ies].”16 The broad language of promptly as possible, shall the “other operations” clause even would report the emergency to the seemingly require an AFE for operations other parties. If Operator that are considered routine maintenance or prepares an AFE for its own trade association-recommended work use, Operator shall furnish (API,17 etc.), unless those operations were any Non-Operator so specifically approved in advance. requesting an information copy thereof for any single Given increased scrutiny on the industry project costing in excess of associated with potential spills and other _____ Dollars ($____).14 environmental impacts, important unanswered questions linger regarding an Given the tremendous expense typically operator’s ability to react quickly to associated with oilfield projects, and the potential environmentally hazardous quick response often necessary to react to situations. For example, the operator may changing circumstances, the “other be faced with a non-“emergency” situation operations” clause is frequently the subject that nevertheless may need to be rectified of litigation. The bottom line advice for an promptly to avoid environmental operator proceeding under the “other contamination without enough time to operations” clause is to seek working formally issue an AFE and await responses.

14 AAPL Form 610-1989 JOA at Art. VI.D. Note 15 It is worth noting that the AAPL Form 610-1989 that the AAPL Form 610-1989 JOA only requires a JOA adds a provision that binds all parties to “other pre-negotiated percentage of non-operators to consent operations” if a previously negotiated percentage of to “other operations.” See AAPL Form 610-1989 the working interest owners consents to the JOA at Art. VI.D (“If within thirty (30) days thereof operation. Operator secures the written consent of any party or 16 See Abraxas Petroleum Corp. v. Hornburg, 20 parties owning at least ____% of the interests of the S.W.3d 741, 756-57 (Tex. App.—El Paso 2000, no parties entitled to participate in such operation, each pet.) (“routine repairs” shall not be AFE’ed if below party having the right to participate in such project a $30,000 single project expenditure limit in the shall be bound by the terms of such proposal and “other operations” clause in Article VII.D.3 of an shall be obligated to pay its proportionate share of the APPL Form 610-1977 JOA). costs of the proposed project as if it had consented to such project pursuant to the terms of the proposal.”). 17 The American Petroleum Institute promulgates and The widely used AAPL Form 610-1982 JOA does publishes oil and gas standards, among many other not contain this provision. things. See www.api.org.

P-3

a. Paint Rock Operating, LLC v. b. Cone v. Fagadau Energy Corp., 68 Chisholm Exploration, Inc., 339 S.W.3d 147 (Tex. App.—Eastland S.W.3d 771 (Tex. App.—Eastland 2001, pet. denied) – non-operator’s 2011, no pet.) – operator breaches refusal to consent to an “other the JOA if it doesn’t provide an operation” does not preclude the AFE before issuing a JIB operation, but prohibits the operator from charging the non- In one recent case, the Eastland Court of operators for those expenses Appeals faced a dispute over the operator’s untimely Joint Interest Billings (“JIBs”) and In Cone, the operator, working under an the non-operator’s alleged failure to timely AAPL Form 610-1982 JOA, proposed a challenge the charges.18 In that case, the water flood program and unitization for the operator sent JIBs to the non-operator that purpose of secondary recovery of included, among other things, several repair hydrocarbons.20 All working interest operations that cost in excess of the $10,000 owners except for Cone agreed to the water “other operations” clause limit in the JOA flood program and the unitization. The and for which no AFE had been previously operator proceeded with the program and provided. The non-operator refused to pay unitization despite Cone’s disapproval, those charges, because no AFE had been which resulted in “significantly” increased provided, and returned marked-up JIBs and production from the unit.21 a check for the balance of the charges. The operator sued the non-operator to recover The operator charged Cone in connection the disputed charges. with the water flood program which Cone refused to pay. The operator sued Cone and The court cursorily determined – without an Cone counterclaimed. Cone argued that explanation – that the operator violates or under the “other operations” clause, the breaches the JOA if the operator merely operator could not proceed with any project sends a JIB to a non-operator that includes that cost in excess of the pre-negotiated expenses in excess of the previously amount ($15,000 in this case) without the negotiated “other operations” amount consent of all working interest owners, and without first providing an AFE.19 Not only that proceeding with any such project did the non-operator not pay for the charges constituted a breach of the JOA.22 identified in the JIB, the non-operator succeeded in showing the operator actually The court first noted that the relationship of breached the JOA by failing to issue an AFE the parties was that of cotenants to various under the “other operations” clause. Under leaseholds which compromised the Contract the Paint Rock opinion, an operator should Area.23 In a cotenant relationship, one take great care to ensure AFEs are issued cotenant can extract minerals from the when appropriate, and to ensure charges in excess of the “other operations” amount are 20 only incurred in true emergency situations. Cone v. Fagadau Energy Corp., 68 S.W.3d 147 (Tex. App.—Eastland 2001, pet. denied). 18 Paint Rock Operating, LLC v. Chisholm 21 Cone, 68 S.W.3d at 151. Exploration, Inc., 339 S.W.3d 771 (Tex. App.— 22 Id. at 157. Eastland 2011, no pet.). 23 19 Id. Paint Rock, 339 S.W.3d at 776.

P-4 common property without first obtaining the reworking an already producing well to consent of his cotenants.24 The court first increase its production. The operator noted that the JOA “other operations” clause interpreted the “rework” provision to mean does protect working interest owners from that it could not rework the well without the being charged for a large expenditure that consent of all non-operators. One non- exceeds a predetermined amount (akin to operator withheld his consent and the veto power). The court noted, however that operator sued to compel the non-operator to “this limitation is only for accounting consent. purposes. This provision does not alter the common-law rule of unilateral extraction The court in Ladd Petroleum concluded that and development of minerals by cotenants. the operator could not compel the non- The provision does not restrict production operator to consent to the proposed rework activities which may be undertaken by the without the unanimous consent of all non- operator on the contract area. . . . This operators. The Cone court criticized Ladd provision does not allow the non-operator to Petroleum because of Ladd Petroleum’s prohibit operations by withholding his overbroad or misguided interpretation of the consent.”25 “rework” provision.28 The Cone court noted that the “rework” provision at issue was i. Cone’s criticism of Texstar North contained in the article of the JOA entitled America v. Ladd Petroleum “Expenditures and Liability of Parties,” and the Cone court did not “believe that the The Cone court also pointed out that the provision would have prevented the operator Corpus Christi Court of Appeals reached a in Ladd Petroleum from reworking the well similar result in Texstar North America v. without every working interest owner’s Ladd Petroleum Corp. after analyzing an consent if the operator chose to do so at the identical contractual provision in an expense of itself and of the consenting analogous JOA dispute.26 The Cone court, working interest owners.”29 The Cone court however, did criticize the Ladd Petroleum believed that the JOA provision could only opinion. In Ladd Petroleum, the JOA prevent the operator from charging the non- provided that “[w]ithout the consent of all operator for the reworking operation but parties, no well shall be reworked or could not prevent the operator from plugged back.”27 The operator proposed performing the reworking operation.30

24 Id. 25 Id. at 157-58 (emphasis added). At least one court has noted that the holding in Cone cannot be construed as a universal rule that all cotenants have a right to develop their minerals. See Veterans Land Bd. v. Lesley, 281 S.W.3d 602, 620-21 and n. 11 (Tex. App.—Eastland 2009, pet. granted) (the Supreme Court of Texas has heard oral argument in S.W.2d 672, 675 (Tex. App—Corpus Christi 1991, this case, but as of the date of this paper, has not yet writ den’d). issued an opinion). 28 Cone v. Fagadau Energy Corp., 68 S.W.3d 147, 26 See Cone, 68 S.W.3d at 158 (citing Texstar N. 158 (Tex. App.—Eastland 2001, pet. denied). Am., Inc. v. Ladd Petroleum Corp., 809 S.W.2d 672, 29 Id. 675 (Tex. App—Corpus Christi 1991, writ den’d)). 30 Id. 27 Texstar N. Am., Inc. v. Ladd Petroleum Corp., 809

P-5 c. LPCX Corp. v. Red Eagle Oil Co., the operator hostage, either literally or 818 P.2d 431 (Okla. 1991) – monetarily. operator liable for cost of work and attorneys’ fees when it performed To defeat this predicament, an operator “other operations” without an AFE should consider amending older AAPL but billed the expense to the non- JOAs to increase the single expenditure limit operators in the “other operations” clause, add the mandatory AAPL JOA Form 610-1989 In LPCX, the parties entered into an provision that only requires a pre-negotiated operating agreement that required the percentage of non-operators to consent to operator to provide prior notification of reworking or other similar operations,33 or reworking operations to the non-operators. broaden the definition of expenses “required The operator stipulated it had not provided to deal with [an] emergency to safeguard life prior notice of reworking operations as and property.”34 required in the agreement, although the operator did introduce into evidence drilling 2. Liability of non-operator to third reports showing work in progress to show parties that some notification was provided. The non-operator introduced evidence showing The typical JOA provides some liability the reworking operations would cost in protection to non-operators for acts excess of $10,000 (the pre-negotiated performed by the operator. Indeed, the amount over which notice was required). Supreme Court of Texas has recognized that The trial court found in favor of the non- one of the primary reasons, if not the biggest operator, requiring the operator to pay for reason, for the use of JOAs is to shield non- the reworking operations and the non- operators.35 For example, the following operator’s attorneys’ fees.31 The Oklahoma collective provisions are designed at least in Supreme Court affirmed the award.32 part to shield the non-operator from liability:

d. Recommendation for operators ______shall be the Operator of the Contract Area, and Under older AAPL Form 610 JOAs, shall conduct and direct and operators may face untenable situations: have full control of all either proceed with reworking or other operations on the Contract operations necessary to maintain or increase production at their sole expense if only one 33 See, e.g. AAPL Form 610-1989 JOA at Art. VI.D non-operator refuses to consent (under (“If within thirty (30) days thereof Operator secures Cone), or worse, be prohibited from the written consent of any party or parties owning at performing what the operator believes to be least ____% of the interests of the parties entitled to necessary reworking or other operations by a participate in such operation, each party having the non-operator’s refusal to consent (under right to participate in such project shall be bound by the terms of such proposal and shall be obligated to Ladd Petroleum). This predicament pay its proportionate share of the costs of the essentially permits a non-operator to hold proposed project as if it had consented to such project pursuant to the terms of the proposal.”). 31 LPCX Corp. v. Red Eagle Oil Co., 818 P.2d 431, 34 See, e.g. AAPL Form 610-1989 JOA at Art. VI.D. 434 (Okla. 1991). 35 Tawes v. Barnes, 340 S.W.3d 419, 426 (Tex. 32 Id. at 441-45. 2011).

P-6 Area as permitted and partnership, joint venture, required by, and within the agency relationship or limits of this agreement. In association, or to render the its performance of services parties liable as partners. . . hereunder for the Non- .37 Operators, Operator shall be an independent contractor not ` Except as herein otherwise subject to the control or specifically provided, direction of the Non- Operator shall promptly pay Operators except as to the and discharge expenses type of operation to be incurred in the development undertaken in accordance and operation of the Contract with the election procedures Area pursuant to this contained in this agreement. agreement and shall charge Operator shall not be each of the parties hereto deemed, or hold itself out as, with their respective shares the agent of the Non- upon the expense basis Operators with authority to provided in Exhibit “C.”38 bind them to any obligation or liability assumed or Courts have held that non-operators should incurred by Operator as to be shielded from liability to non- any third party.36 governmental third party litigants for the debts, , and of the operator The liability of the parties where: (1) relevant JOA provisions are used; shall be several, not joint or (2) operations and managerial control has collective. Each party shall been delegated to the operator; and (3) the be responsible only for its non-operator does not exercise control over obligations and shall be liable the operator or give specific work only for its proportionate instructions to the operator. Given that share of the costs of under the above described circumstances, developing and operating the the non-operator is not involved in making Contract Area. . . . [N]o most day-to-day decisions, this sort of party shall have any liability limited liability is not unreasonable. to third parties hereunder to satisfy the default of any a. Tawes v. Barnes, 340 S.W.3d 419 other party in the payment of (Tex. 2011) – mineral lessor is not any expense or obligation a third-party beneficiary of the hereunder. It is not the JOA intention of the parties to create, nor shall this Under a JOA, the parties agreed to the initial agreement be construed as creating, a mining or other 37 AAPL Form 610-1982 JOA at Art. VII.A. The underlined text is now in the AAPL Form 610-1989 JOA at Art. VII.A. 36 AAPL Form 610-1982 JOA at Art. V.A. The underlined text is now in the AAPL Form 610-1989 38 AAPL Form 610-1982 JOA at Art. VII.D.; AAPL JOA at Art. V.A. Form 610-1989 JOA at Art. V.D.2.

P-7 drilling of one gas well and permitted the The Supreme Court of Texas ultimately operator to propose additional drilling concluded that the lessor was not a third- operations. A non-operator proposed party beneficiary of the JOA because the drilling two additional gas wells and the JOA Royalty Provision (in this instance) non-operators consented. The operator was only intended to allocate general chose to go non-consent and one of the non- expenses among the parties consenting to operators replaced the original operator on the drilling of additional, non-consent wells, the two non-consent wells (the operator and the JOA Royalty Provision only cannot continue as the operator on wells it provided clarity to the operator for has elected to non-consent). Importantly, accounting purposes.43 After this fanciful under the JOA, the consenting parties agreed journey through both state and federal to pay all royalties which would have been district and appellate courts, the Fifth Circuit owed to the lessors of the leases by the non- ultimately incorporated the Texas Supreme consenting parties had they consented to the Court’s holding.44 additional operations from the beginning. The lessor sued the prior operator and the During the journey, both the Supreme Court new operator seeking to recover additional of Texas and the Southern District of Texas royalties. recognized the liability shield available to non-operators under the AAPL Form 610- The case first ended up before the United 1982 JOA at issue: “JOAs govern operations States Bankruptcy Court for the Southern involving great financial risk and are District of Texas, which held that one of the therefore utilized for the purpose of parties that had remained a non-operator shielding non-operators, like Tawes, from throughout was obligated to perform the liability for all costs or other obligations original operator’s duties of paying the incurred in conducting the operations,”45 lessor’s royalties.39 The bankruptcy court and “[i]ndeed, Texas courts have held that then found the non-operator liable to the lessor, as a third-party beneficiary, for 43 Tawes, 340 S.W.3d at 425-26, 428-29 (“The unpaid royalties.40 The non-operator generalized nature of the JOA Royalty Provision, appealed to the United States District Court coupled with the JOA’s all-encompassing accounting for the Southern District of Texas, which scheme for non-consent wells, lacks the specificity 41 necessary to directly benefit a third-party beneficiary affirmed the bankruptcy court. The non- to the Dominion–Moose Agreements. . . . As derived operator, not content with the district court’s from our analysis of the unambiguous language of ruling, appealed to the Fifth Circuit. The the Dominion–Moose Agreements in light of both oil Fifth Circuit then certified a question to the and gas industry standards and customs and Texas Supreme Court of Texas.42 case law, we conclude that Dominion and Moose clearly intended to allocate responsibility for the payment of many categories of expenses in the context of drilling non-consent wells. Accordingly, 39 Barnes v. Dominion Ok. Tex. Exploration & Prod., any benefit Barnes derived by way of the JOA Inc. (In re Moose Oil & Gas Co.), 347 B.R. 868, 874 Royalty Provision was merely incidental and not (Bankr. S.D. Tex. 2006). enough to entitle her to the third-party beneficiary status she seeks. Therefore, Barnes may not enforce 40 Id. the Dominion–Moose Agreements under this theory of recovery.”). 41 Tawes v. Barnes, No. V–06–123, 2008 WL 905209 at *10, *17 (S.D. Tex. Mar. 31, 2008). 44 In re Moose Oil & Gas Co., --- F.3d ----, 2011 WL 2521094 (5th Cir. Jun 27, 2011). 42 In re Moose Oil & Gas Co., 613 F.3d 521 (5th Cir. 2010). 45 Tawes, 340 S.W.3d at 426.

P-8 non-operators are generally not liable under failed to show that [the non- partnership, joint venture or agency theories operator] exercised any for operator’s development and operation control over [the operator]’s costs.”46 operations or gave any detailed instructions to [the b. Lavy v. Pitts, 29 S.W.3d 353 (Tex. operator] about how to App.—Eastland 2000, pet. den.) – conduct its business. The non-operators not liable for authorization for expenditure pumper’s personal injuries because sheets produced by [the non-operator did not exercise plaintiff] only showed that control over the operations or give [the non-operator] exercised any instructions control over the expenditures for which he was accountable After an explosion occurred that severely under the A.A.P.L. injured a pumper, the pumper sued the non- agreement. The expenditure operator under a premises liability theory, estimates related only to the alleging that pooled hydrocarbon vapors cost of operations, not to the constituted a dangerous condition. The method. In short, the record pumper alleged the non-operator retained fails to show any evidence of the right to control the production operations the “nexus” between any and owed him, as an invitee, a duty of control retained by [the non- reasonable care to remedy or warn him of operator] and a duty of care the dangerous condition. The non-operator owed to [the plaintiff].48 moved for summary judgment and the trial court granted the non-operator’s motion. Surprisingly, there are not any other readily apparent reported Texas cases relying on The court recited the JOA provision in Lavy for a similar proposition. Presumably, which the non-operator delegated “power the lack of any such cases may suggest and authority” to the operator and gave the plaintiffs are no longer suing non-operators operator the authority to “conduct and direct and instead seek to recover any and all and have full control of all operations.”47 damages from the operator. The appellate court rejected the pumper’s cause of action against the non-operator c. Berchelmann v. The Western because the evidence failed to show Company, 363 S.W.2d 875 (Tex. App.—El Paso 1962, writ ref’d that [the non-operator] had n.r.e.) – non-operators not held any knowledge of the day-to- liable to suppliers hired by the day operations of [the operator when the operator failed operator]. The evidence also to pay

The operator agreed under a joint operating 46 Tawes v. Barnes, No. V–06–123, 2008 WL 905209 agreement to refrain from obligating itself to at *9 (S.D. Tex. Mar. 31, 2008). operations that cost in excess of $2,500 47 Lavy v. Pitts, 29 S.W.3d 353, 357-58 (Tex. App.— without written approval of the non- Eastland 2000, pet. denied). The JOA at issue appears to be an AAPL Form 610-1982 model form based on the cited provisions. 48 Lavy, 29 S.W.3d at 359.

P-9 operators. The operator regularly billed the finding that the non-operator gave non-operators their proportionate share of instructions or exercised control. expenses. Several suppliers of the operator were not paid by the operator and 3. The JOA operator is held to the subsequently sued both the operator and the “reasonably prudent operator” non-operators, even though they had not standard contracted with the non-operators, nor did they ever send the non-operators any bills, Under the APPL Form 610-1989 JOA: invoices, or notices of any sort. [The] Operator shall conduct The court first found that the operator and its activities under this non-operators had not created a partnership agreement as a reasonably or a mining partnership, and then concluded prudent operator, in a good that the suppliers “failed to prove the and workmanlike manner, necessary elements of partnership and with due diligence and agency so as to make the [non-operators] dispatch, in accordance with jointly and severally liable with [the good oilfield practice, and in operator] for the debts and obligations compliance with applicable incurred by [the operator].”49 law and regulation, but in no event shall it have any d. Non-operator considerations liability as Operator to the other parties for losses The non-operator should take caution to sustained or liabilities ensure it does not enter into contracts with incurred except such as may suppliers or contractors who are supplying result from gross negligence goods or conducting work in the Contract or willful misconduct.50 Area for the operator. The non-operator should also not act on bills or invoices that This provision is obviously exculpatory, and may be sent to the non-operator from to prevail in a suit for suppliers or contractors, and should not refer related to the operator’s performance of its to themselves or the group in a way that obligations under the JOA, the non-operator connotes a partnership or joint venture. usually must prove the operator was either grossly negligent or acted with willful A non-operator can engage in routine misconduct when it breached the JOA.51 activities as provided in the JOA, like proposing, receiving, and consenting/non- a. Gross negligence consenting to AFEs as allowed under the JOA without fear of a finding that the non- To prove gross negligence, the plaintiff must operator gave instructions or exercised show the defendants “had actual subjective control. The non-operator can also knowledge of an extreme risk of serious participate in joint owner meetings pursuant

to the terms of the JOA without fear of a 50 AAPL Form 610-1989 JOA at Art. V.A. 49 Berchelmann v. The Western Co., 363 S.W.2d 875, 51 IP Petroleum Co., Inc. v. Wevanco Energy, L.L.C., 878 (Tex. App.—El Paso 1962, writ ref’d n.r.e.) 116 S.W.3d 888, 896 (Tex. App.—Houston [1st (citing Youngstown Sheet and Tube Co. v. Penn, 363 Dist.] 2003, pet. denied) (citing Cone, 68 S.W.3d at S.W.2d 230 (Tex. 1963)). 155; Abraxas Petroleum Corp., 20 S.W.3d at 759)).

P-10 harm.”52 The magnitude of the risk is judged from the viewpoint of the defendant The AAPL Form 610-1977 and 1982 JOA at the time the events occurred. The harm provides: anticipated must be “extraordinary harm, not the type of harm ordinarily associated with Operator . . . shall conduct breaches of contract or even with bad faith and direct and have full denials of contract rights; harm such as control of all operations on ‘death, grievous physical injury, or financial the Contract Area as ruin.’”53 permitted and required by, and within the limits of, this b. Willful misconduct agreement. It shall conduct all such operations in a good Texas courts have defined “willful and workmanlike manner. . . misconduct” in a manner akin to gross .57 negligence.54 A finding of willful misconduct requires evidence of “a specific The original operator standard began with a intent by [the operator] to cause substantial “good and workmanlike manner,” which injury to [the non-operators].”55 most courts construed to mean the operator must act as a “reasonably prudent c. Operator standards under prior operator.”58 The most recent AAPL Form AAPL JOAs 610 JOA (the 1989 JOA quoted above) now explicitly requires the operator to act as a The standard JOA operators are held to has “reasonably prudent operator.”59 evolved over time, at least under AAPL JOAs. The AAPL Form 610-1956 JOA d. What is a reasonably prudent provides: operator?

Operator . . . shall conduct A reasonably prudent operator is an operator and direct and have full of ordinary prudence.60 Such an operator control of all operations on has neither the highest nor the lowest the Unit Area as permitted prudence, but merely possesses average and required by, and within the limits of, this agreement. 57 AAPL Form 610-1977 and 1982 JOA. It shall conduct all such 58 See, e.g. Norman v. Apache Corp., 19 F.3d 1017, operations in a good and 1029-30 (5th Cir. 1994) (applying Texas law and 56 workmanlike manner…. analyzing an unidentified JOA from with an operator’s conduct clause identical to the AAPL 52 IP Petroleum Co., 116 S.W.3d at 897. Form 610-1956 JOA); Johnston v. Am. Cometra, Inc., 837 S.W.2d 711, 716 (Tex. App.—Austin 1992, 53 Id. at 896 (quoting Transp. Ins. Co. v. Moriel, 879 writ denied) (analyzing an AAPL Form 610-1977 S.W.2d 10, 24 (Tex. 1994)) (citing Bluebonnet Sav. JOA). Bank, F.S.B. v. Grayridge Apartment Homes, Inc., 907 S.W.2d 904, 911 (Tex.App.—Houston [1st Dist.] 59 AAPL Form 610-1989 JOA at Art. V.A. 1995, writ denied)). 60 Good v. TXO Prod. Corp., 763 S.W.2d 59, 60 54 IP Petroleum Co., 116 S.W.3d at 898. (Tex. App.—Amarillo 1988, writ denied); Shell Oil Co. v. Stansbury, 401 S.W.2d 623, 629 (Tex. App.— 55 Id. Amarillo 1988) writ ref’d n.r.e. 410 S.W.2d 187 56 AAPL Form 610-1956 JOA. (Tex. 1966).

P-11 prudence and intelligence and acts with options and sued the operator. ordinary diligence under the same or similar circumstances.61 At the trial court, the jury found the operator had been grossly negligent and engaged in Whether or not an operator acted as a willful misconduct, but on appeal the “reasonably prudent operator” is a question Houston Court of Appeals found the of fact for the jury to determine.62 The duty evidence only supported a finding of owed to non-operators is a specific duty of ordinary negligence.64 Given that the care which is not a matter within the evidence only supported a finding that the knowledge of an average juror but is instead operator engaged in ordinary negligence, the an area of specialized knowledge requiring court concluded that the operator did not expert testimony.63 breach the JOA because the JOA only provided a remedy for the non-operator if e. IP Petroleum Co., Inc. v. Wevanco the operator caused losses or liabilities as a Energy, L.L.C., 116 S.W.3d 888 result of gross negligence or willful (Tex. App.—Houston [1st Dist.] misconduct.65 2003, pet. denied) – even if the jury finds the operator acted with f. COPAS issues gross negligence or with willful misconduct, if the evidence does Operators and non-operators should also be not support such a finding, the aware of COPAS accounting procedures operator cannot be found to have usually attached to and made a part of most violated the JOA JOAs. Under Article II (Direct Charges), Section 12 (Other Expenditures) 1974 In IP Petroleum, the court drew a line COPAS, the “Operator shall charge the Joint between breach of contract claims requiring account with the following items: . . . Any a showing of gross negligence and those that other expenditure not covered or dealt with do not require such a showing. The parties in the foregoing provisions of this Section II, signed a JOA providing that the operator or in Section III, and which is incurred by would drill a well sufficient to test a the Operator in the necessary and proper particular formation. As the well began to conduct of the Joint Operations.”66 In one reach the target depth, the operator became case, the court held that this COPAS “catch- concerned the well was taking on too much all” provision allows the operator to charge water, open hole completed the well, and the joint account for expenses incurred by insisted that the well had been drilled to or through the target formation. The operator 64 IP Petroleum Co, 116 S.W.3d at 898. gave notice of his intention to plug and 65 Id. See also Amoco Rocmount Co. v. Anschutz abandon the well and, under the JOA, the Corp., 7 F.3d 909, 923 (10th Cir. 1993). non-operators could either agree or take over 66 the well. The non-operators rejected both “Direct Charges” an Operator may charge the Joint Account under Section II of COPAS usually include rentals, royalties, labor, employee benefits, material, 61 Id. transportation, contract services, equipment and facilities furnished by operator, damages and losses 62 Cabot Corp. v. Brown, 754 S.W.2d 104, 108 (Tex. to joint property, legal expenses, taxes, insurance and 1987). the “other expenditures” discussed above. Section III 63 Bonn Operating Co. v. Devon Energy Prod. Co., of COPAS usually sets out the overhead charges an LP, 2009 WL 484218, *15 (N.D. Tex. 2009). Operator may charge the Joint Account.

P-12 the operator (3-D seismic testing in that provision in COPAS 2005 provides case) which are necessary and proper, or in flexibility by allowing the operator to other words are “prudent.”67 attempt to recover unforeseen costs not addressed in the direct charges section and The 1984 COPAS contains a slightly not built into the overhead rate. The voting different provision, adding an “of direct requirement safeguards the nonoperators and benefit” requirement: “Any other provides an objective standard for expenditure not covered or dealt with in the nonoperators to use to determine the validity foregoing provisions of this Section II, or in of any charges made under this other Section III and which is of direct benefit to expenditures section.”69 the Joint Property and is incurred by the

Operator in the necessary and proper conduct of the Joint Operations.”68 i. Operator must timely send JIBs, but if the non-operator fails to However, the “new” 2005 COPAS added a timely object, the non-operator requirement that the parties approve any may still be liable for the charge charges made under the “Other Expenditures” catch-all provision: “Any AAPL JOAs require the operator to send other expenditure not covered or dealt with JIBs to “Non-Operators on or before the last in the foregoing provisions of this Section II day of each month for their proportionate (Direct Charges), or in Section III share of the Joint Account for the preceding (Overhead) and which is of direct benefit to month.”70 Nevertheless, if the operator does the Joint Property and is incurred by the not timely send JIBs but the non-operator Operator in the necessary and proper does not timely except or challenge the JIB, conduct of the Joint Operations. Charges the non-operator may still be liable for the made under this Section II.15 shall require charge. Unfortunately for the operator, the approval of the Parties, pursuant to Section non-operators, in a standard JOA, are given I.6.A (General Matters).” up to twenty-four (24) months to submit a

challenge following the end of the calendar This new voting requirement was specifically added as a means to safeguard non-operators: “This (Other Expenditures) provision in COPAS 1984 and 1986 remains 69 McClellan and Cougevan, The New COPAS in the COPAS 2005 form, but to reduce Accounting Procedure, The Landman Magazine (AAPL May/June 2006) at 46-47. See also Boigon, disputes and alleviate concerns that this The Joint Operating Agreement in a Hostile provision could be used as a ‘catchall’ for an Environment, 38th Annual Institute on Oil and Gas operator to charge costs a nonoperator may Law and Taxation (Southwestern Legal Foundation consider covered by overhead, a charge 1987) at pp. 5-21 to 5-22 (“The nonoperators could made under this provision in COPAS 2005 also argue the objectionable costs were not now requires approval of the nonoperators ‘necessary or proper’ to the conduct of operations as pursuant to the approval by the parties required by Section II.12 of the Accounting Procedure or that the costs were not ‘reasonable and section in the general provisions. This necessary’ as required either by the common-law rules relating to the operating cotenant’s right of 67 Gaither Petroleum Corp. v. Hilcorp Energy I, L.P., reimbursement or by the ‘reasonably prudent 2002 WL 1965457, *3 (Tex. App.—Corpus Christi operator’ standard inherent in the JOA.”) 2002, no pet.). 70 AAPL Form 610-1982 JOA at Art. 1.2 68 COPAS 1984-1 Onshore Accounting Procedure (recognizing a standard COPAS accounting (emphasis added). procedure).

P-13 year in which the JIB was issued.71 the disputed charges because the operator knew what charges were objected to and ii. Paint Rock Operating, LLC v. why, even though the non-operator only Chisholm Exploration, Inc., 339 marked through the disputed charges and did S.W.3d 771 (Tex. App.— not provide an explanation. The court Eastland 2011, no pet.) – non- cautioned, however, that “[w]e do not hold operator fulfills JIB objection that marking out charges on a JIB and requirement without explaining returning it to the operator is sufficient, as a why it objects to JIBs matter of law, to comply with COPAS Article 1.4.”75 In one recent case, the Eastland Court of Appeals faced a dispute over the operator’s In the court’s next holding, the court found untimely JIBs and the non-operator’s that the operator could not escalate overhead alleged failure to timely challenge the rates in the manner in which it did. The charges.72 In that case, the operator JOA allowed for an annual adjustment of admittedly sent JIBs up to six months late. overhead expenses as of the first day of The non-operator reviewed those invoices April of each year by the percentage and disagreed with several charges. The increase or decrease in the average weekly non-operator disagreed with the operator’s earnings of Crude Petroleum and Gas decision to increase the $400 overhead rate Production Workers for the last calendar charged per month per well, the operator’s year. In going back several years and decision to hire a production supervisor,73 determining what the rate should have been and several repair operations that were not if the operator had made an annual preceded by an AFE. The non-operator adjustment, the court found the operator marked through, circled, or otherwise violated the JOA and charged an excessive notated the disputed charges, returned those overhead amount. The court held that the marked-up JIBs and a check for the balance operator “was entitled to readjust the of the charges. The operator sued the non- overhead rate as of April 1, 2006, but only operator to recover the disputed charges. from the rate currently in effect.”76 Lastly, the court determined that the operator The court first noted that “[t]he purpose of violated the JOA by undertaking repairs in the JOA’s written exception provision was excess of $10,00077 without first issuing an to provide the operator with notice. The AFE. JOA, however, does not define what constitutes a sufficient written exception.”74 The lessons learned in Paint Rock can be In its first holding, the court determined that summarized as follows: (1) the operator the non-operator had properly excepted to must timely submit JIBs; (2) the non- operator should provide a timely exception 71 AAPL Form 610-1982 JOA at Art. 1.4. 72 Paint Rock, 339 S.W.3d 771. 75 Id. at n. 4. 73 The current operator had replaced a previous 76 Id. at 776 (emphasis added). operator who had consistently charged the $400 per 77 The JOA at issue in Paint Rock required the month per well overhead charge and the non-operator operator to issue an AFE if any operational costs informed the previous operator it felt a production were expected to exceed $10,000, as discussed above supervisor was unnecessary. Id. at 775-76. under the “Other Operations” clause section of this 74 Id. at 776. paper.

P-14 to any disputed charges; (3) the non-operator to participate, under the “non-consent” should explain why it excepts to any clause, the party who proposed the operation disputed charges (assuming the operator would bear the full responsibility for out-of- would not already know why the charges pocket costs for drilling the proposed well. were disputed); (4) annual overhead can The party who proposed the operation is only be readjusted from the rate currently in then permitted to recover its costs of effect – even if the rate had not been production until a stated percentage, adjusted in prior years; and (5) the most sometimes 200%, 300%, 400%, and so on. elementary lesson – an operator should send The percentage acts as a penalty to an AFE if an expense is expected to exceed discourage a non-participating party from the pre-negotiated “other operations” realizing revenues or profits when it amount. assumed no risk.80 One now-former member of the Supreme Court of Texas has 4. Non-consent penalty provisions suggested the “non-consent penalty” would be more aptly described as a “liquidated In a typical JOA, a “non-consent” clause bonus clause.”81 provides that if one party proposes an operation (often the drilling of a well), that a. XTO Energy Inc. v. Smith Prod. party must provide notice78 and the other Inc., 282 S.W.3d 672, n. 2 (Tex. party or parties then have a choice to App.—Houston [14th Dist.] 2009, participate or not.79 If one party chooses not no pet.) – a non-operator cannot change its election to avoid 78 The Houston Court of Appeals has recognized that potential non-consent penalties if a non-operator fails to fulfill the notice even if thirty days from the date of requirements, it cannot rely on the non-consent the notice have not gone by provision to penalize another party. See El Paso Production Co. v. Valence Operating Co., 112 S.W.3d 616, 623-24 (Tex. App.—Houston [1st Dist.] In XTO Energy, a non-operator first sent in 2003, pet. denied) (“Even if Valence’s contention is elections not to participate in the drilling of correct, Sonat’s failure to consent to the rework four new wells. After the remainder of the operation cannot result in the imposition of any of the non-operators timely elected to participate, contractual penalties because the obligation to give one non-operator – within thirty days from timely notice of consent is triggered only by the required notice of proposed operations. Because the evidence conclusively established that Valence did and sued the operator for allegedly wrongfully not give such notice, it was error for the trial court to withholding $455,377.91 in revenues. The non- submit jury question number six.”). See also ExxonMobil Corp. v. Valence Operating Co., 174 operator sought a writ of attachment and the court S.W.3d 303, 317 (Tex. App.—Houston [1st Dist.] ordered the operator to deposit the disputed amount 2005, pet. denied) (“‘[N]otice’ from strangers to the in the registry of the court. The operator sought a JOA, coming after the farmout agreement had writ of mandamus, which was conditionally already been executed, entirely failed to satisfy the granted.). purpose of the notice requirement, namely, that 80 See, e.g. Beckham Res., Inc. v. Mantle Res., L.L.C., Valence be given the opportunity to consent, or not, 2010 WL 672880, *1 (Tex. App.—Corpus Christi to a proposal made by a party to the JOA who had 2010, pet. denied). agreed to all its terms and conditions-not by strangers to the JOA with different interests.”). 81 See XTO Energy Inc. v. Smith Prod. Inc., 282 S.W.3d 672, n. 2 (Tex. App.—Houston [14th Dist.] 79 See, e.g. AAPL Form 610-1989 JOA at Art. VI.B. 2009, no pet.) (quoting Valence Operating Co. v. See In re Reveille Res. (Tex.), Inc., --- S.W.3d ----, Dorsett, 164 S.W.3d 656, 665-66 (Tex. 2005) 2011 WL 149872 (Tex. App.—San Antonio 2011, no (BRISTER, J. concurring)). pet.) (Non-operator withdrew consent to drill a well

P-15 the date the notice was sent – sent signed even if it seeks to do so AFEs to the operator indicating it now had within thirty days after elected to participate. The non-operator receipt of the proposing explained that the previous election not to party’s notice and regardless participate had been sent in error and those of whether the other parties notices are revoked. The operator refused to have materially changed their recognize the changed election and positions in reliance on the proceeded with drilling the four new wells. initial election.84

The court noted that the JOA was not b. Valence Operating Co. v. Dorsett, ambiguous, because according to the JOA, 164 S.W.3d 656 (Tex. 2005) – the “[o]nce a receiving party timely gives notice operator can commence subsequent of its election regarding the drilling operations before the expiration of operation by properly replying within the the notice/participation election thirty days, the Notice Period has expired as period to that party. . . . When, as in this case, all receiving parties give notice of their In Valence, the parties executed a modified elections in less than thirty days after AAPL Form 610-1977 JOA which receiving the notice, the Notice Period contained a standard non-consent provision. expires in less than thirty days.”82 The court The operator provided notice to the non- went on to find that permitting the operator operators of its intention to drill eight new to act in reliance on elections was important wells, but in each case began preparatory because “otherwise, as to quickly drilled work – and in some cases – actual drilling, wells, a party might change its election to before thirty days had elapsed from the avoid dry-hole costs that the party notice date. One non-operator received the previously agreed to bear or to share in the notices but did not elect to participate and rewards of a successful well when the party the operator imposed the non-consent had not shared in the risks.”83 penalty. The non-operator disputed the imposition of the non-consent penalty, The court emphatically concluded: arguing that the operator could not proceed with any work before thirty days had Under the unambiguous elapsed from the notice of intention to language of the JOAs, if, perform drilling or other proposed after proper notice of a operations. The non-operator sued and the proposal to drill an additional trial court rendered summary judgment in well under Article VI.B.1., a party to the JOAs timely and properly gives notice to the 84 Id. at 681. In dissent, Justice Eva Guzman (then proposing party as to whether with the Fourteenth Court of Appeals) noted that it elects to participate in the “[t]he contractual provisions at issue describe no circumstance under which the thirty-day Notice cost of the proposed Period expires in less than thirty days. . . . The intent operation, then that party of a contract is not changed simply because the may not change its election, circumstances do not precisely match the anticipated scenarios. [] Because the interpretation urged by [the non-operator] is reasonable, the contracts are, at best, 82 XTO Energy Inc., 282 S.W.3d at 678. ambiguous. Thus, I would reverse and remand the 83 Id. at 679. case for further proceedings.” Id. at 685, 688.

P-16 favor of the operator. Operator terminates its legal existence, no longer owns an The intermediate appellate court reversed interest hereunder in the and rendered judgment in favor of the non- Contract Area, or is no longer operator. The Supreme Court of Texas capable of serving as concluded that the relevant provisions of the Operator, Operator shall be JOA “place[] no temporal limitation on [the deemed to have resigned operator’s] ability to commence work on the without any action by Non- proposed projects. The Agreement clearly Operators, except the states that ‘[t]he parties receiving such a selection of a successor.88 notice shall have thirty (30) days after receipt of the notice within which to notify Deemed resignations obviously spur the parties wishing to do the work whether litigation. For example, in Hill v. Heritage they elect to participate in the cost of the Resources, Inc., the non-operators argued proposed operation.’”85 The Court went on there was a deemed resignation of the to find that “the thirty-day notice period sets operator because the operator did not have a a deadline for Dorsett to decide whether to cost-bearing interest.89 The court ultimately participate in proposed operations. Nothing sided with the operator.90 In another case, in the language of the Agreement forbids the the court found the non-operators knowingly operator from commencing work before the selected a successor operator who did not end of the notice period.”86 The Court also own any interest in the contract area and concluded that the non-consent provision is thereby waived the operator-interest not an unenforceable requirement.91 provision.87 b. Removal 5. Removal or resignation of the operator The AAPL Form 610-1989 JOA also provides a mechanism for the non-operators The typical JOA provides two basic ways to to forcefully remove the operator: facilitate the resignation or removal of the

operator. 88 AAPL Form 610-1989 at Art. V.B.1. 89 a. Resignation/deemed resignation Hill v. Heritage Res., Inc., 964 S.W.2d 89, 104 (Tex. App.—El Paso 1997, pet. denied).

The APPL Form 610-1989 JOA provides: 90 Plaintiffs also argued there was legally insufficient evidence, or it was against the great weight and Operator may resign at any preponderance of the evidence, for the jury to find the operator did not breach the JOA when it became time by giving written notice insolvent (an alleged deemed resignation). See thereof to Non-Operators. If Heritage, 964 S.W.2d at 140. The court rejected that argument because the plaintiffs drafted the jury questions regarding the operator’s status as the 85 Valence Operating Co. v. Dorsett, 164 S.W.3d 656, operator and did not request an issue on the 662 (Tex. 2005). operator’s bankruptcy and its impact on its status as 86 Id. at 662-63. See also Bonn Operating Co. v. the operator. Id. In doing so, the plaintiffs waived Devon Energy Prod. Co., L.P., 613 F.3d 532, 535-36 any error on this issue. Id. (5th Cir. 2010). 91 Purvis Oil Corp. v. Hilin, 890 S.W.2d 931, 937 87 Valence Operating, 164 S.W.3d at 664-65. (Tex. App.—El Paso 1994, no writ).

P-17 allegedly refused to step down and the non- Operator may be removed operators sued, seeking an injunction forcing only for good cause by the the operator to step down. The trial court affirmative vote of Non- granted the injunction. On appeal, the court Operators owning a majority noted: interest based on ownership. . . . For purposes hereof, “good It was within the trial court’s cause” shall mean not only discretion to find that the gross negligence or willful status quo between the parties misconduct but also the consisted in non-operator material breach of or inability working interest owners to meet the standards of having the contractual ability operation contained in Article under the JOA to follow the V.A. or material failure or provision for removal and inability to perform its selection of successor as obligations under this written, which [the operator] agreement.92 now challenges as invalid and requiring judicial In some instances, however, even if the determination of cause for parties agree that the operator should be removal. . . . By [one of the removed, another agreement may preclude non-operator’s] amended the non-operators from removing the original petition, it alleged operator.93 Other factors may also intervene that it had a right, based on a to preclude the removal of an operator, for majority vote of the non- example automatic bankruptcy protection if operators to be the successor the operator files for bankruptcy.94 Operator. Mr. David Bradshaw, CEO and Director c. Injunction to remove an operator of [one non-operator], testified that [the non- In a more drastic case, the non-operators in operators] voted their an international JOA voted to remove the interests to remove in January operator due to alleged breaches of the JOA 1999. According to Mr. and the failure to proceed in a good and Bradshaw, [the operator] was workmanlike manner.95 The operator furnished with copies of the vote ballots and has not

92 resigned operations. Mr. AAPL Form 610-1989 at Art. V.B.1. See, e.g. R & Bradshaw also testified as to R Res. Corp. v. Echelon Oil and Gas, L.L.C., 2010 WL 5575919, *2 (Tex. App.—Austin 2011, pet. filed the same result in the June 22, 2011) (non-operators voted to remove November 2000 ballot vote. operator for “good cause” due to alleged accounting Further, Mr. Bradshaw deficiencies, among other things). testified that it was [one non- 93 Inex Indus., Inc. v. Alpar Res., Inc., 717 S.W.2d operator’s] position that [the 685 (Tex. App.—Amarillo 1986, no writ). operator] has failed or 94 See, e.g. 11 U.S.C. § 362. refused to carry out or perform duties under the 95 See Tri-Star Petroleum Co. v. Tipperary Corp., 101 JOA. . . . The trial court S.W.3d 583 (Tex. App.—El Paso 2003, pet. denied).

P-18 could conclude from the evidence that the non- operators determined that they had cause to remove [the operator] as Operator.96

E. Conclusion

The JOA is a lengthy, complicated agreement that governs various subjects among multiples parties. Oftentimes, what may appear to be a straightforward standard AAPL JOA has been modified in material respects, obviously impacting the obligations, duties, and rights of the parties. The bottom-line and obvious advice to an operator or non-operator is to know and understand the various terms of the agreement, and to strictly comply with those terms to the extent possible. An imprudent and reckless party to a JOA faces the fear of dire consequences, including the adverse award of significant actual monetary damages, the possibility of the adverse award of the opposing parties’ attorneys’ fees, and/or even injunctive relief in some circumstances.

96 Id. at 588-90.

P-19